Why Sell? - By Kevin Lichte

Why Sell.....? 

Managing your winning trades is one of the toughest things to master.  Managing a losing trade is easy-just stop out at your 1R and move on.  Managing a winning trade, particularly those going to new all-time highs (like many stocks out there this year) is a lot more difficult.  In the chat I've often asked the question "Why Sell?"  This is really a question anyone should ask themselves before selling a position.  And really think about that question-ultimately we sell positions to lower our risk.  When we sell we are removing a "risk asset" (our stock) and moving it to a "risk free" asset (cash).

The "Why Sell" question comes in because we need to determine what the greater risk is.  Is the risk holding and having the stock stop us out?  Is the risk us acting emotionally on the next consolidation and liquidating the position?  Is the stock hitting resistance, and the risk is now for a double top or some other bearish price action?  Sometimes the risk can even be selling too soon!  Making a 2R trade is good, but if it turns out being a 10R trade down the road, was it really that good?  In that case the risk was to the upside rather than the downside.  All of these are valid risks.  And that's where the "Why Sell" comes in.

I think for the majority of us as traders the desire to lock in profit can sometimes overcome our better intentions and end up limiting our profits.  Taking profits does make sense to do many times, but I'm suggesting you re-think the act of taking profits in terms of risk-on or risk-off.  Which direction carries the bigger risk?  Does having big profits make you start to mismanage your positions?  Based on your technical analysis, is the position likely to start turning against you?   When you have considered these and determined it truly is best to sell, then by all means go for it.

I am a big fan of riding partials and lotto shares for as long as I can.  This is a great and easy way for traders to overcome that urge to sell (or at least to deal with it).  When you've lowered your risk by taking profits, it's much easier to hold through pullbacks and chop.  Just make sure that you are selling at logical points-resistance levels, places where the price action would lead you to expect a reversal.

I've got only 1/8th of my original BA position, which at this point is over 65% above my average entry price.  When you have trimmed your positions it helps to detach you emotionally from the positions and the price movement.  When you are down to lottos in a market that has been trending like it has this year, you can more or less forget about the position and just let the trend continue working.  When the trend is over, you get out.  When you are down to lotto shares, going from a 12R to a 9R on those last shares is not the end of the world, you can give them a lot of wiggle room and just let the market work for you.

What I personally have been trying to work on towards the latter half of this year and the first few months of next year, is to be more patient on the first sell.  This is going to be difficult! Full positions take a lot of emotional investment, but from analyzing my trades this year, I've learned that in order to maximize my profits I need to have more shares when it reaches that first sell point. This will ultimately lead to larger profits.

The stop out spot on partial positions will always be the toughest part of trade management.  In this year's market, it has paid to be very loose with stops and let the market bring your positions back to life.  The risk in this market has been not being in it!  As the market changes we will have to adapt to the risks those changes bring.

Key Takeaways -

Size small, and have a wide enough stop to let the play work itself out

Trust the setup

Take profits in 1/4s or 1/3s and only when there is a valid reason for doing so

Don't take profits on day one of a breakout

ALWAYS ride some lottos

Take a look at a few of these trades this year,  BA and ATVI were earlier in the year and CAT just recently.  After looking at these trades I made this year, you can see why I always ask "Why Sell":